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Risk of Businesses

[As of June 15, 2018]

Of the matters related to the status of the business and accounting as described in the Annual Securities Report, the following may have a significant impact on the decisions of investors.
Any forward looking statements contained in this section are made based on the judgment of the CRESCO Group as of March 31, 2018.

1. Risks related to changes in the business environment

The Group endeavors to respond flexibly to changes in the business environment by researching the market trend and expanding areas of business and customer groups. However, there is an growing tendency that demand for IT investment is significantly affected by IT strategies promoted and encouraged by the Japanese government as well as structural and other changes including the aging and decreasing population, in addition to domestic and international situations, economic conditions, business sentiment, etc. Consequently, if the Japanese economy slows down or deteriorates, IT investment may decrease and the operating results of the Group can be adversely affected.

2. Risks related to the occurrence of inaccurate estimates and delivery delays

The Group develops estimates by forecasting necessary workload and cost based on the work process and other elements of the relevant project. However, it is difficult to develop accurate estimates for all projects. If the actual cost exceeds the estimates due to an increase in workload caused by changes in specifications and/or additional is work required, the profitability of the project may fall or even become unprofitable.
In addition, the Group is engaged in project management practice based on its original method for the strict observance of "Quality, Cost, and Delivery." It is, however, difficult to avoid risks, including those associated with external factors, completely. If the Group fails to complete or deliver the work by the date agreed with the customer, it will be subject to delay penalties, and if the Group ultimately fails to complete or deliver the work, it will incur a liability for damages. In such cases, the operating results of the Group can be adversely affected.

3. Risks related to information security

In the course of its business, the Group from time to time handles various confidential information (business information, customer information, personal information, etc.) and is required to carefully handle and strictly manage such information. The Company has made every possible effort to this end by establishing the Internal Control Committee and the Information Security Committee, developing various policies together with related internal regulations, updating and modifying the information infrastructure, and reinforcing the management system.
Furthermore, employees and contractors, upon signing agreements, are regularly provided with appropriate training and security checks in order to raise their awareness about information management and prevent any information leakage from within. In addition, support for the Act on the Protection of Personal Information has been strengthened by making an effort to obtain Privacy Mark certification and ISMS, and, at the same time, an effort towards safety control has been made by clarifying the hierarchy of responsibilities, in accordance with the Personal Information Protection Management System (PMS). However, if a leakage of personal information or confidential information should occur despite these measures, the operating results of the Group can be adversely affected due to liability for damages, loss of social credibility, etc., occurring as a result.

4. Risks related to the reliance on certain customers

Sales to IBM Japan, Ltd. account for a significant percentage of the Group’s consolidated net sales as shown in the table below:

Counterparty Fiscal
year
ended
March 31,
2017
Fiscal
year
ended
March 31,
2018
Net sales
(Thousands of yen)
Percentage Net sales
(Thousands of yen)
Percentage
IBM Japan, Ltd. 5,196,838 16.8
%
4,697,689 14.1
%
Total consolidated net sales 30,893,555 100.0
%
33,328,477 100.0
%

Above figures do not include consumption taxes.

The Company has entered into a master transaction agreement with IBM Japan, Ltd., and the commercial relationship between the two parties has been stable since the commencement of transactions. A change in IBM Japan, Ltd.'s business and/or outsourcing policies, however, can adversely affect the operating results of the Group.

5. Risks related to securing and developing human resources and employee resignations

We recognize hiring and developing excellent human resources as one of the key management challenges concerning the performance of the Group. In particular, competent system engineers are essential for further business expansion going forward. In order to secure human resources, the Group has been making efforts to reinforce internship recruitment and employee referral recruitment. It also recognizes resignation prevention and employee retention measures as important issues and has implemented off-site meetings and coaching and mentor programs. If, despite such efforts and measures, the Group fails to secure or develop such human resources as planned and if employee resignations increase, the operating results of the Group can be adversely affected.

6. Risks related to alliances with business partners

In the course of business operations, the Group has established alliances with contractors. While the Group has implemented measures such as providing project information and holding business partner forums in order to strengthen the alliances with business partners, the Group's inability to secure business partners in a timely and appropriate manner, or any changes with regard to such relationships can adversely affect operating results of the Group due to reasons including the hindrance of the launch and/or execution of a project and/or the provision of services.

7. Risks related to long working hours and excessive work

In light of structural problems in the development process and the high dependence on human resources in its operations, the Group has positively addressed personnel management through working hour management, encouragement to take paid vacation, etc. However, the structure of system development, system failure at a customer’s location, responses to a delay in project development, etc., in addition to services or products offered by the Group, may result in long working hours and excessive work, which can cause health problems and/or a decline in productivity that adversely affects the operating results of the Group.

8. Risks related to intensified competition

The Group regards lines of business that use and utilize advanced technology as future areas of growth and tries to differentiate itself from other companies in order to enhance its competitiveness continuously and improve customer satisfaction. However, intensified competition as a result of an increase in companies newly entering growth areas (this can make the characteristic features of the Group ordinary ones, which in turn results in difficulty in differentiation), the emergence of a competitor which provides a revolutionary service utilizing completely new technology that has not previously existed, etc., can adversely affect the operating results of the Group.

9. Risks related to compliance

Led by the Internal Control Committee of the Company, the Group established the "Basic Policy on the Establishment of the Internal Control System" and the "Code of Conduct for Compliance Management" for an improvement in corporate ethics as well as for the strict compliance with laws, regulations, and internal regulations, etc. by each and every officer and employee of the Group. It is, however, difficult to completely avoid risks related to compliance, and the occurrence of a situation contrary to laws, regulations, etc. can adversely affect the operating results of the Group.

10. Risks related to changes in the market environment

In the Group’s business areas, technological innovation progresses rapidly, and the industry standard and users' needs quickly change in response to such rapid progress. In order to respond to such changes, related services and products are launched one after another. If, however, the Group lags behind in responding to such technologies, etc. which become new industry standards, services and products offered by the Group can become obsolete, causing a decline in its competitiveness against competitors, which can adversely affect the operating results of the Group.

11. Risks related to litigation, etc.

Lawsuits may be brought against the Group with regard to its business activities, liabilities pertaining to services or products offered, labor issues, etc. Depending on the development of such lawsuits, the Group may be subject to liabilities for damages and loss of credibility. In such cases, the operating results of the Group can be adversely affected. While the Group is reinforcing awareness efforts and the internal management system so that no service or product offered by the Group may infringe any intellectual property of any third party, it is possible that a third party already possesses intellectual property which is beyond the Group's knowledge. In that case, the Group can be subject to a suit or claim for the reason of infringement, forcing the Group to bear the damage or to acquire or develop alternative technology, adversely affecting the operating results of the Group.

12. Risks related to financial markets

The valuation of the securities and other financial instruments held by the Group is dependent on trends in the domestic and overseas economies as well as stock markets and other financial markets. As such, we regard this as an important risk concerning fund management and other business investments. While the Group works to minimize risk by grasping fair values of securities, etc. in appropriate timing, it is difficult to avoid risk completely, and a decline in asset value can adversely affect the operating results of the Group. Moreover, if the price of financial instruments held by the Group should fall, the Group may incur a significant loss. In addition, a future revision in systems, standards, etc., concerning the accounting treatment of fair value of financial instruments can adversely affect the operating results of the Group.

13. Risks related to price competition

The market in which the Group operates is under severe price competition. While the Company strives to secure profit margins, for example, by introducing consulting services and IT businesses driven by solution proposals, changes in prices of orders received caused by further intensification of competition and prolonged demand for lower prices can adversely affect the operating results of the Group.

14. Risks related to natural disasters, etc.

In the event of the materialization of external threats, including natural disasters such as earthquakes, storms or floods, accidents such as fires, large-scale system failures, closure of places of business due to infectious disease, or outbreak of physical or cyber terrorism, business continuity may be disrupted in terms of securing offices and places of business, securing workforce and ensuring safety. In such cases, the operating results of the Group may be adversely affected.

15. Risks related to investment including M&A and capital and business alliance

The Group promotes active M&A and capital and business alliances for the purpose of expanding the areas of business and reinforcing the profit basis in the software development business, which is the main line of business, advanced technology related business and new business areas. Investment is executed upon conducting detailed due diligence under cooperation with external experts and, at the same time, sufficiently examining investment effect, risk, etc. in advance at the Board of Directors, etc. Profit initially expected, however, may not be obtained due to changes in the business environment and other factors, resulting in a decreased possibility of recovering investment. If the possibility of recovering investment decreases, business reorganization or similar measures may be implemented in order to streamline management and strengthen the business base, in which case costs entailed by reorganization can be incurred temporarily, adversely affecting the operating results of the Group.
Sometimes, business reorganization or similar measures cannot be implemented in an appropriate period and method, in which case the whole or a part of investment can become a loss or additional investment can be required, etc., adversely affecting the operating results of the Group.